Incoming R&D Tax Relief Changes

Research and Development tax relief is changing. In this article, I outline the key changes and consider how this may affect businesses with a summary of actions you may need to take to benefit from this valuable relief.

• From 1 April 2024, a new and less-generous R&D incentive will come into existence for SME businesses in the UK and may bring with it complications around which company in the R&D supply chain will be eligible to claim tax relief on a qualifying project.
• The headline rate of tax relief will generally be between 15p-16p of tax savings for every £1 spent on qualifying R&D activities undertaken by eligible companies (down from the more beneficial rate of 25p-33p in every £1).
• Under the new incentive, it is possible that the ownership of R&D projects could be pushed up the supply chain meaning customers, rather than the suppliers doing the R&D work, may be in a position to make the claim for R&D tax relief.
• In an attempt to simplify the complexities surrounding R&D tax relief, the new incentive being introduced will effectively merge together the two historic incentives (the SME and RDEC schemes).
• A separate incentive will remain available for high-intensity R&D loss-making SME companies that meet certain thresholds (namely, that 30% of its of total expenditure for an accounting period relates to qualifying R&D).

• The new incentive will affect accounting periods starting on or after 1 April 2024 (e.g. a company with an accounting year-end of 31 March 2025).
• The mechanics will largely follow that of the historic RDEC scheme in that R&D tax relief will be awarded as an above-the-line credit at a rate of 20% of the total qualifying R&D expenditure. This credit can then potentially be offset against a company’s corporation tax liability or, where no liability exists, potentially issued as payable cash credit.
• The amount payable as a cash credit can be restricted based on the other tax liabilities owed by a company or capped at a certain amount dependent on the total PAYE/NIC liabilities incurred on relevant workers.
• Allowable expenditure for the relief will generally follow that of the historic SME scheme rules: staff costs, subcontractor costs, externally provided workers, software costs, consumables costs and payments to subjects involved in clinical trials will all potentially be qualifying.
• Except in rare circumstances, expenditure incurred on overseas activities will not be eligible for inclusion in a claim.
• All companies will still be required to submit the mandatory Additional Information Form to HMRC prior to the submission of any claim for R&D tax relief.

• Companies who undertake R&D within the context of a contractual arrangement for their customers will need to be aware of how the new incentive is to operate.
• Contracted out R&D has been a contentious and technical matter for a number of years.

> Where a customer anticipates that R&D is needed in order to fulfil a contract, the company (supplier) doing the work will be unable to make a claim for R&D tax relief.

> Where a customer is indifferent, or unaware, to the fact that R&D may be needed in order to fulfil a contract then the company (supplier) doing the work will be able to make a claim for R&D tax relief.

> Where a customer is ineligible to make a claim (e.g. it is a company based overseas, or an entity not subject to corporation tax in the UK), then the company (supplier) will be able to make a claim for R&D tax relief.

> Where a company doing in-house R&D of its own accord intentionally contracts out some of the R&D to a third-party, the company can make a claim for R&D tax relief on both the in-house and third-party costs.

> Where customer-facing R&D is being undertaken, each contractual arrangement must be assessed individually, alongside the activities and relationship between customer and supplier, to understand which scenario may be applicable.

• Under the new incentive, the rules surrounding subsidised R&D expenditure have now become obsolete. This means that, regardless of whether a company is in receipt of grants or subsidies in respect of its R&D projects, it will not have to make any additional or separate claims for tax relief nor be penalised at a lower rate of relief for that subsidised work.
• The PAYE/NIC cap rules under the new incentive take the form of the existing SME PAYE/NIC cap rules. These are more generous than the existing cap rules.
• A separate incentive remains available for high-intensity R&D SME companies who spend 30% of their total expenditure on qualifying R&D. This will enable eligible loss-making SMEs to access a payable cash credit at the traditional 14.5% rate

• The 15p-16p rate of relief will be lower than most SMEs will historically have been used to. This reduction in generosity has arisen because of the increased cost of funding the incentive.
• The complexities around contracted-out R&D will cause headaches for customers and suppliers of R&D alike. The expectations of what R&D and non-R&D work will be required may need to be communicated at an early stage between customers and suppliers to provide better clarity on ownership of R&D. New contracts may be drafted where clauses asserting the right to R&D relief may become relevant.
• Overseas R&D expenditure will generally be ineligible for inclusion in the claim. Exceptions to this rule will be where the expenditure meets the definition of qualifying overseas expenditure which includes: circumstances where it would be wholly unreasonable to undertake R&D in the UK because of geographical, environmental or social factors; or where legal or regulatory requirements require the activity to take place in a specific territory. The cost of labour and/or workplace availability are explicitly ruled out as being a reason for overseas expenditure to be eligible.

• Companies could be at risk of sleepwalking into a detrimental scenario whereby their customer-facing R&D efforts may no longer be eligible for R&D tax relief so it will be important for businesses to re-acquaint themselves with the terms and clauses of their contracts.
• Companies may also be unaware of the implications that a reduced rate of tax relief could have on their cashflow as the generosity of the relief could reduce expected tax savings by upwards of 40%. It will be important to evaluate R&D budgets, the expected tax savings, and what time and resource may be required to actually undertake a claim for R&D tax relief whilst having to adjust to the new rules.
• A number of companies undertaking R&D are not familiar with the requirements of the mandatory Additional Information Form. The level of detail required may be more substantial than claimants are historically used to and leaving it late to gather this detail can prove problematic. Project-by-project record-keeping is a must going forwards.

Albert Goodman are pleased to continue to support innovative companies with their R&D claims in the light of these significant changes and if you would like to speak with one of our specialist advisers, please do get in touch.